6
   

THE ROOTCAUSE OF THE FINANCIAL TURMOIL ?

 
 
Reply Sat 20 Sep, 2008 03:09 pm
many are wondering what the rootcause of the "near fatal" collapse of wallstreet - and perhaps the world financial system might be .
robert siklos , editor-at-large , at FORTUNE magazine provides an interesting point of view .
he states that the rootcause might very well be misleading statistical data , such as GDP , CPI and unemployment data .
he cites other financial writers and commentators that claim that data was manipulated to help wallstreet . he thinks that the financial situation might be much worse than current financial data suggest .

(i suppose one might compare it polishing rotten apples in the hope that the "shine" will entice the customer to buy the rotten apples without asking too many questions of the seller .
we've certainly bought apples that looked perfectly fine on the outside , only to turn out to be rotten at the core. )

the answer of the BLS (bureau of labor statistics) says "nonsense " !
“The improvements chosen by the BLS that some critics construe to be a response to short-term political pressure were, in fact, the result of analysis and recommendations over decades, and those changes are consistent with international standards for statistics ” .

you be the judge !
i'm certainly NOT an expert in the "science" (or should it be "fine art" ?) of economics to make a valid judgement .
hbg




link to the original post :
http://business.timesonline.co.uk/tol/business/columnists/article4790099.ece

Quote:
September 20, 2008

Forget short-sellers, Pollyanna creep could be the culprit
Richard Siklos: America Inc
There is no shortage of villains being accused of igniting the financial brushfire raging across Wall Street: the housing bubble, misguided interest rate policy, poor regulation, numbskull credit ratings agencies, vicious short-sellers and out-of-control personal greed are a few suspects.

Maybe they're all to blame. But what if the underlying problem goes far beyond the financial sector? What if the US economy has just been a lot worse than was thought for a long time and now the chickens are coming home to roost?

That's the dark thinking beyond what is known as Pollyanna creep, a phrase coined by an economist named John Williams. He runs a website called Shadowstats.com that trades in the idea that some key US government statistics have become so optimistically misleading as to become useless. Now, this might sound a bit like a plotline from one of those Matrix movies - we're all living in an illusion to inure us from dire reality. But given what's gone on with Freddie and Fannie, Lehman, Merrill, AIG, Washington Mutual and more, it doesn't sound so fringe.

Indeed, over the past few years, some of Mr Williams's views on economic indicators - the consumer price index, in particular - have been echoed by better-known and leading investment community figures, such as the bond investor Bill Gross, the strategist Stephen Roach and James Grant.

“The numbers are misleading, and Wall Street uses the numbers to help sell their products,” says Mr Williams, whose chief bugaboos, in addition to the CPI, are GDP and unemployment rates. “Recently, I'd contend that what we've been getting is absolutely junk on the GDP,” he says, despite recent official figures that US GDP grew 3.3 per cent in the second quarter. “There's no question that we're in a recession and probably have been in one since the last quarter of 2006. It didn't start with the housing mortgage crisis.”

According to Mr Williams, all the big measures have had their methodologies revised over the past few decades to paint the US economy in the best possible light. However, he says, changes in methodology were always spelt out at the time - with rationales for doing so - thus it's not as though this has gone on in the dark of night.

In his recently published and rather depressing book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism, one-time Nixon White House advisor Kevin Phillips discusses Pollyanna creep as part of an era of “bullnomics: the pied-piping of America toward a misleading financial ideology [the efficiency and reliability of markets], buttressed by a spectrum of dubious thinkers, doctrines and enablers”. In popular culture, he notes, this coincided with a surge in self-help and get-rich media, perhaps best exemplified by the 2007 bestselling book, The Secret, which effectively argued that you can make money by imagining it.

More practically, he writes that some of the biggest changes to CPI calculation happened between 1997 and 1999 “while the public and the politicians were preoccupied by bull market euphoria and the actions in Congress to impeach Bill Clinton”. In their effort to reduce social security outlays - and buttressed by a belief that CPI in fact overstated inflation - Alan Greenspan and others implemented some controversial modifications that factored in such issues as “hedonics”: an abstruse way of measuring increased satisfaction from goods. (Example: as described in a 2005 Wall Street Journal story, a specialist in the Bureau of Labor Statistics (BLS), which compiles the CPI, adjusted the price of a $329.99 TV down to $194.99 after concluding that an improvement in the quality of its screen over a previous model of the same size was worth at least $135. The TV still cost $329.99 retail, but the CPI recorded it as being worth nearly 30 per cent less.)

Pollyanna creep did not arise from any single decision, nor was it the product of a conspiracy. It's not unlike the advent of “earnings before one-time items” reporting in the private sector - an accountancy practice virtually unheard of 20 years ago but which has become commonplace and presents a rosier view of a company's performance. These practices are accepted because they suit the purposes of all involved. But that doesn't make them the right thing to do.

Four years ago, the bond investor Bill Gross, of Pimco, made waves when he published a newsletter calling the CPI an “haute con job”. He recently penned an update, arguing that it was hard to reconcile America's reported CPI rates with the much higher rates from a basket of 24 other countries. Noting that he does not write for a “conspiracy blog,” Gross went on: “Just as many in the global economy are refusing to mimic the American-style fixation with superficialities in favour of hard work and legitimate disclosure, investors might suddenly awake to the notion that US inflation should be, and in fact is, closer to worldwide levels than previously thought.”

On its website - in a section about “misconceptions” about the CPI - the BLS debunks the debunkers. “The improvements chosen by the BLS that some critics construe to be a response to short-term political pressure were, in fact, the result of analysis and recommendations over decades, and those changes are consistent with international standards for statistics,” the bureau says.

The Pollyanna creep crowd, naturally, is not buying it and this week they may have some currency. And amid all the talk of financial markets clean-up, the debate over whether the biggest economic indicators are as useful as they should be may be a can of worms worth reopening.

" Richard Siklos is an editor-at-large at Fortune magazine
 
Ramafuchs
 
  -1  
Reply Sat 20 Sep, 2008 03:34 pm
@hamburger,
i once in a while peruse thro IT the Fortune magazine.

Your title distracts my attention or should i say attracts my concentration?
THE ROOTCAUSE OF THE FINANCIAL TURMOIL
With my poor english there are some words which are relevant to the title of this thread and those words are
Avarice
Acquisition
Rapacity
Selfishness and callous indifference of the populace.
0 Replies
 
cicerone imposter
 
  2  
Reply Sat 20 Sep, 2008 04:12 pm
@hamburger,
hbg, As I've said many times of a2k, I've always been skeptical about government produced statistics. I'm glad to see somebody else with the same opinion as mine.

Let's face it; even during the past half year, our government kept telling us we're still not in a recession when all signs around us told us different. The evidence was overwhelming, yet most people believed our government. Now, it's too late.
0 Replies
 
farmerman
 
  2  
Reply Sat 20 Sep, 2008 04:50 pm
actually, were still not in a recession. Weve skipped ahead a bit.
cicerone imposter
 
  2  
Reply Sat 20 Sep, 2008 04:57 pm
@farmerman,
farmerman, The governments GDP growth numbers are not all that dependable. They also keep telling us that inflation is more-or-less in check, except for the past couple of months - while wages remained stagnant, people continued to lose jobs, and the cost of basics such as fuel and food continue to rise.

The government's stats are high questionable, if not outright fraud.
Robert Gentel
 
  1  
Reply Sat 20 Sep, 2008 06:08 pm
@hamburger,
There are a lot of reasons that the turmoil is more complex and less quick to self-correct than we are used to, but I think the root cause is pretty clear: hugely over-valued real estate prices.

As the real estate bubble burst a huge amount of value vaporized and while in the past the financial pain would have largely been limited to the people who borrowed or lent the money based off this miscalculation this time around the fact that financial institutions have been trading debt like it's an non-risky asset is causing a lot more contagion. The complexity of the transactions hid a lot of the risk and those transactions need to be regulated. Institutions should be required to carry certain balances to offset those risks because when the cards are all dealt it's clear that the country is going to bail them out. If they are going to get a safety net from the public, they should be required to operate within regulated risk to minimize the public's exposure to the risks they are taking.

The real estate bubble is supposed to happen but it's not supposed to be connected to so many institutions with so little capital to weather the storm.
0 Replies
 
Ramafuchs
 
  -1  
Reply Sat 20 Sep, 2008 06:16 pm
@hamburger,
neither you nor any rational members of A2k is responsible for this pathetic American way of life.
Ramaq fuchs
0 Replies
 
talk72000
 
  2  
Reply Sun 21 Sep, 2008 01:14 am
@cicerone imposter,
The government issues numbers to make itself look good e.g. the unemployment figures leave out those whose unemployment benefits have exhausted and are still looking for work.
cicerone imposter
 
  1  
Reply Sun 21 Sep, 2008 11:38 am
@talk72000,
Yes, I know, but not many people realize that simple fact, because the government only provides what is now 6.1% unemployment when in reality it's probably double that.

As I've said on another thread, we've already lost over 600,000 jobs since January, and it requires a minimum of creating 100,000 jobs every month just to meet demand. Job creation has been abysmal since Bush took over the white house; some say worse than Hoover. How can unemployment numbers be so low?

Most Americans do not understand macro-economics, and the only information they have about our economy is what we read in the newspapers, and what our politicians keep telling us; "the fundamentals of our economy is strong."

All this while more Americans continue to lose their jobs and homes, healthcare (increasing at double-digits every year), salaries remaining stagnant, and food and fuel costing double and triple more than recent years.

Now we have the biggest financial crisis since the great depression. Yup, our economy is strong.

cicerone imposter
 
  1  
Reply Sun 21 Sep, 2008 03:48 pm
@cicerone imposter,
A friend in Australia just sent this today.

Quote:
The Times (of London) reports today that ...

"American executives of the failed Lehman Brothers bank, parts of which were taken over by Barclays last week, will still receive millions in bonuses.

"Barclays has pledged to pay $2.5 billion in bonuses and salaries to Lehman staff in New York, whose collapse brought the world’s financial system to the brink of failure.

"A group of eight senior executives and 200 key staff will enjoy multi-million-pound rewards for their performance in the past nine months. A further 8,800 staff will share the remainder of the pot, with many having guaranteed jobs as part of the takeover of the US arm of the investment bank."

They're testing us, people. Just how much can we take of these thieves before we call for their public beheadings?

If you know or see a fat banker, spit on him!

Murf

http://www.timesonline.co.uk/tol/news/uk/article4795086.ece

Don't forget; the US taxpayers are paying this bonus.
0 Replies
 
hamburger
 
  3  
Reply Sun 21 Sep, 2008 05:37 pm
@hamburger,
thanks for your replies !
it seems appropriate that i state my own position on the various points . forgive me if i start rambling !
i'll probably spread my opinions out over a few posts - i'm a slow keyboarder .
many of my comments will be coloured - perhaps tainted - by personal experiences .
please keep in mind that i live in canada and some of my comments would likely be somewhat different if i were living in the U.S.
additional comments are certainly welcome .
hbg
-----------------------------------------------------------------------------------------------
THE MORTGAGE PROBLEM / CRISIS
this brings me back to 1963 when we bought our house (we are still living in the same house btw) .
most immigrants were by buying old "fixer-uppers" . since i was not a trades person , that really was not an option for us .
the canadian government had just turned over some former crownland to CMHC (canada's housing administration) . the land - a former penitentiary farm situated within the city limits - was being divided into lots and made available to any purchaser ready to build within six months .
we visited a real estate broker recommend to us to get advice .
he was an older fellow working with just a secretary - just a little office in an old downtown building .
he questioned us a bit on our plans , income .... and recommended that we buy one of the lots . we decided to splurge and buy a 10,000 sqft. corner lot for $1,750 cash - standard lots were only $1,500 !
he recommended an established builder with a good track record . since we did not want to pay for an architect , he showed us three different standard houses : a small 950 sqft. at $12,000 , a 1,050 sqft. at $14,500 and a 1,200 sqft. at $17,000 .
his advice was simple : take the 1,050 sqft. at $14,500 - you can afford it and there'll be a ready market for it if you ever want to sell .
there was not even an attempt to sell us the larger house , though he would have made a higher commission on the larger house .

when i see the sales "tactics" being employed today to get people to buy more than they can afford , it makes me shudder .
(we even had a cemetary sales guy call on us , trying to convince us that we needed to buy a plot to show others "that we had arrived" , that we "had made it" in the community ! mrs h gave me certain hints to prevent me from giving him the bum's rush) .

i'm sure many people that bought monster houses with monster mortgages had not the slightest idea what they were letting themselves in for .
it was the greed of the salesperson that made the decision for them .

just a few months ago there was a story about banking giant UBS in the financial pages . sales were sagging . the CEO called one of his V.P. 's demanding an explanation . apparently UBS had lost a number of top sales staff to other investment dealers paying higher commissions and extra-extra bonus payments . the CEO's solution : "phone those salespeople and get them back here ! pay them whatever it takes to get them back ! " .

the end result as reported by the BBC on 1 april 2008 :
Quote:
Swiss financial giant UBS has reported that its writedowns as a result of the sub-prime crisis have more than doubled to about $37bn (£18.5bn).

It is the largest writedown by any bank since the credit crunch began.

UBS also announced that its chairman and former chief executive Marcel Ospel would not be seeking re-appointment.



imo the mess in the mortgage market must be blamed on greedy and unscrupulous financial institutions and their sales people !
hbg
cicerone imposter
 
  2  
Reply Sun 21 Sep, 2008 06:12 pm
@hamburger,
hbg, The lesson that was taught when we were in the market to buy a house was "buy the best house you can afford to buy," because with time the payments will become less.

Since then, I've learned some other lessons; a) buy a home that is less subject to natural disasters such as fires and floods, b) buy in a good area where the schools are best for your children, and c) buy only if you plan to stay for at least five years.

Others might be, 1) have an inspection done by an expert before you buy for dry-rot and termites, and 2) make sure the plumbing is good.







roger
 
  1  
Reply Sun 21 Sep, 2008 06:12 pm
@hamburger,
Sure, but don't the buyers get a bit of credit? I was looking at houses three years ago in an already inflated market. It was not at all difficult to learn the total payments to include interest, insurance, and PMI. The upshot was, everything livable, in a safe neighborhood in this oil & gas boomtown was out of range. Oh, I could have qualified for more, but it didn't seem like a good decision.
0 Replies
 
dyslexia
 
  2  
Reply Sun 21 Sep, 2008 07:07 pm
we bought our home 4 yrs ago, we had made a list of what we felt we needed/wanted and could afford. our bank qualified us for double what we spent; we spent more before we moved in putting on a new roof, tile floors, sky lights and re-stuccoed the exterior. we met our needs within the confines of what we could afford. we are pretty happy with the decision we made 1400 sq ft, 3 bdrms, 2 baths and a pleasant yard/patio.
cicerone imposter
 
  1  
Reply Sun 21 Sep, 2008 07:14 pm
@dyslexia,
Sounds like "our" house in Silicon Valley.
0 Replies
 
hamburger
 
  2  
Reply Sun 21 Sep, 2008 07:58 pm
@cicerone imposter,
c.i. wrote :

Quote:
The lesson that was taught when we were in the market to buy a house was "buy the best house you can afford to buy," because with time the payments will become less.


seems that for many homeowners the payments will be MUCH HIGHER as time goes on !

just watching the news , i learn that many houses were sold with "teaser" interest rates . one couple being interviewed said that the sales person assured them when they bought the house 4 years ago that there would be no problem with the interest on the renewal mortgage and that it would carry the same low interest rate .
of course , the renewal rate is MUCH higher than the teaser rate and they will be evicted - since they cannot afford the much higher payments !
(btw the sales person is nowhere to be found - and the mortgage company denies all responsibility) .
hbg
hawkeye10
 
  2  
Reply Sun 21 Sep, 2008 08:05 pm
@hamburger,
increase in home value was supposed to take care of the problem. The idea was to sign people up for home that they could not otherwise afford, let increase in value make them affordable down the road, and in the process the lender gets to collect at least two sets of fees which are all profit (the original sale and the refinance). In actuality many people did the refinance two or three times, so the lender collected three and for sets of fees....it was like printing money.

when home values stopped increasing the scheme fell apart, this causing home values to plummet as repo's hitting the market helped to drive down home values even more. People were never supposed to get to the balloon stage of the mortgage. When they did they had two choices, drop the keys off at the bank, or declare bankruptcy.... oops.
cicerone imposter
 
  3  
Reply Sun 21 Sep, 2008 11:38 pm
@hawkeye10,
That's not the only way people were talked into buying homes they could not afford. The motivation was given to mortgage brokers who were given huge bonuses for selling the mortgage; many "knew" that the buyer were ill-equipped to buy those homes, but sold them anyway. Many of the kickbacks were thousands of dollars in bonus; greed fed on greed.
BumbleBeeBoogie
 
  -2  
Reply Mon 22 Sep, 2008 09:40 am
@cicerone imposter,
http://able2know.org/topic/122904-1
0 Replies
 
FreeDuck
 
  5  
Reply Mon 22 Sep, 2008 10:24 am
Really good that even I can understand here. I was looking for excerpts to post but there is really no good place to break it up. It's a good read.
 

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